Let's end the flip-flopping on R&D

What do Rakon, Fisher & Paykel Healthcare, Tait Electronics, Gallagher Group and Weta Digital have in common? Aside from being successful and enjoying a high profile in business, they’re also the benefactors of the government’s first round of technology development grants, announced late last year. (A second round was awarded in August, with recipients including accounting startup darling Xero.)

National pulled no punches in scrapping the Labour government’s all-encompassing R&D tax credit in favour of a targeted, grant-based approach. It’s not a given – businesses have to apply for a slice of the funding pie along with every other man and his dog, and there are no guarantees.

Sir Paul Callaghan

But it’s time for government to stop flip-flopping on the issue. Cuts to government spending aren’t going to lift New Zealand out of the economic doldrums. Investment in R&D just might.

Sure, there’s a drive to increase investment in R&D and ramp up innovation, but governmental support is imperative. R&D policy is something that needs to transcend the political divide and be planned out beyond just the three-year election cycle – we can’t keep changing our approach to R&D investment every time there’s a change of colour on the politicians’ ties. At the moment, though, we’re failing to see a long-term vision for New Zealand’s economy from the powers-that-be.

The good news: R&D spending is up 13 percent on 2008 figures to almost $2.5 billion in 2010, in spite of the global economic crisis. Science and Innovation Minister Wayne Mapp has been quick to cite the increase as proof that R&D “has the power to drive New Zealand’s economic growth”, but the truth is New Zealand lags behind other developed countries when it comes to investment in R&D. And now for the bad news: It accounts for a paltry 1.3 percent of New Zealand’s GDP, compared with the OECD average of around 2.3 percent.

Prominent scientist and New Zealander of the Year Sir Paul Callaghan believes New Zealand needs to diversify its economy if its goal is to expand GDP per capita, and start selling ‘brain content’. That means you’re selling products where the manufacturing costs aren’t the main costs of the products – it’s the R&D content.

Countries that have seen fast-paced economic turnaround by moving into creative and tech industries have done so with the help of government investment. New Zealand is no exception. Callaghan believes we need increased public investment in R&D to encourage more private investment.

The Budget in May retained the previous Budget’s $234 million increase in support for business R&D spread across four years, but there was a slight decrease in overall spend. Mapp bandied about the country’s financial situation overall as an excuse not to increase the amount. But maybe that’s not the peg we need to hang the R&D coat on.

BusinessNZ chief executive Phil O’Reilly says the question for business is how to work with government to make the most of the private sector’s R&D spend, without necessarily committing more government funding.

“The challenge is to invest one government buck and get back three to five private sector bucks, and that’s not easy, so we’ll need to be more creative than we are today about what a government buck looks like and what it can do.”

Callaghan was frustrated by the budget announcement, saying it lacked a long-term vision for economic growth.

“Even a small increase would have signalled an interest or an intent or an appreciation of that side of our economy.”

The amount of funding required to lift investment is small in dollar terms; we only need about $150 million a year to increase government R&D funding from 0.5 to 0.6 percent of GDP. But budgets are tight. What will face the chop if we want to up our R&D spend? Somewhere along the line, someone’s going to have to make a tough call. If we don’t fund R&D, where is our economic growth going to come from?

Callaghan believes we need a broader vision to achieve a more knowledge-based economy, not just for us, but for the army of tomorrow.

“Kids are missing out in New Zealand because there’s no connect between the education system and a vision for where we’re going to grow our economy.”

That’s not a question of money, but more leadership and a clear articulation of where we’re heading as a country.

So is R&D spending on the brink of collapse? O’Reilly doesn’t think so. He’s seen nothing to suggest that businesses have lost their bottle on R&D – in fact, just the opposite.

“We’re seeing more and more business interest in R&D and innovation more generally.”

He thinks engagement with R&D and innovation is “much more of a profound move among New Zealand companies than simply, ‘We’re doing this because the government will give us a bit of dough’.”

Perhaps it’s about time for the blue team and the red team to sit down over a few beers to really nut out what New Zealand’s economic future is going to look like.